The Zip Co Ltd (ASX: ZIP) share price could be significantly undervalued if it's able to deliver on its growth potential.
Zip is a rapidly growing buy now, pay later business with its main operations in Australia and the US. It has provided guidance that it intends to exit New Zealand.
The business recently reported its FY26 result which included a number of impressive growth metrics.
Given the guidance the business provided for FY27, the outlook looks promising for several reasons.
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Rapid expansion in the US
To buy an ASX growth share, I think we need to see that the company's core offering has a compelling future.
I think it's safe to say that Zip is growing rapidly in the US, which is now its biggest source of growth.
In FY26, the US was responsible for around two-thirds of the company's revenue and that percentage is likely to keep growing. The company's total revenue grew by 24.7%, with 37.3% revenue growth in the US in Australian dollar terms and just 4.6% revenue growth for ANZ. In US dollar terms, US revenue rose 44.3%.
The US is also the company's only source of customer growth. During FY26, US active customers rose 9.3% to 4.65 million, while ANZ active customers decreased 8% to 1.88 million. ANZ revenue grew because of transaction growth.
In FY27, Zip is expecting US total transaction value (TTV) growth of more than 30%.
Increasing profit margins
Zip is not just growing its revenue; its profit margins are increasing thanks to operating leverage, allowing the profits to grow much faster than revenue.
The buy now, pay later business reported in FY26 that its total income rose by 24.6% to $1.35 billion, cash gross profit grew by 26.2% to $642.3 million and cash operating profit (EBTDA) jumped 57.9% to $268.9 million.
I'm not expecting Zip's cash EBITDA to continue growing at that pace forever, given how challenging it is to grow profit as the numbers get bigger.
But, as the company grows, I think its expanding scale and operating leverage will improve profit margins. The company expects its operating margin to rise again in FY27 to between 20% and 22%.
Good Zip share price valuation
At the time of writing, Zip's share price is valued at 28x FY26 earnings, which I don't think is very expensive, given its US TTV is expected to grow by at least 30%.
The projection on Commsec suggests the business could grow its earnings per share (EPS) by close to 48% to 13.6 cents in FY27, 17.8 cents in FY28 and 22.4 cents in FY29.
Those EPS forecasts suggest the company is valued at 19x FY27's estimated earnings at the time of writing. With projections of further profit growth in FY28 and FY29, the company could seem cheap at this level.
